Latest HC decision holds that mere agreement for addition cannot constitute concealment of income leading to penalty!

A number of real life situations arise, where a taxpayer, either during the course of his scrutiny assessment proceedings or during an income-tax survey at his business premises, accepts an addition or disallowance as proposed by the Assessing Officer or even offers the survey team to pay tax on income disclosed during the survey. Can a taxpayer be penalized for concealment in such cases, when such acceptance or offer is made by the taxpayer bonafide, with a view to buy peace of mind and avoid litigation?

The latest decision of the Karnataka High Court in the case of CIT vs. Manjunatha Cotton and Ginning Factory 35 taxmann.com 250 (2013), deserves a special mention, not just because it answers the above question in favour of the taxpayer with a categorical ‘no’ and clearly holds that “levy of penalty is not automatic,” but also because, it can be acknowledged as a masterly treatise on the subject. The High Court has, in its elaborate, well reasoned and absorbing judgement, lucidly analyzed diverse perspectives on the ever raging controversy of penalty and finally rested its conclusion in the light of the underlying ratios of landmark rulings of the Apex Court and various High Courts.

COMPENDIUM ON PENALTY

The above judgment of the Karnataka High Court is indeed a compendium of the principles to be followed while determining the liability of penalty u/s. 271(1)(c) of the Income-tax Act. It reminds us that the proceedings for imposition of penalty, though emanating from proceedings of assessment, are independent and separate aspects of the proceeding. The levy of penalty is not a matter of course. It has to be found that the taxpayer has indeed concealed any income. Where there is no concealment, or no material for concealment, no penalty can be imposed. The mere addition to the taxable income would not automatically lead to an order of penalty. The levy of penalty is, thus, not an automatic concomitant of the assessment.

In the above context, the Court noted that the findings recorded in the assessment proceedings insofar as ‘concealment of income’ and ‘furnishing of incorrect particulars’ would not operate as ‘res judicata’ in the penalty proceedings. It is open to the taxpayer to contest the said proceedings on merits. The findings recorded in the assessment order are only for the purpose of initiating the penalty proceedings and the same cannot be said to be conclusive. It is only when the authority can record a clear satisfaction that non-disclosure of income or furnishing inaccurate particulars by the taxpayer was with the intention of evading tax, that it amounts to concealment or furnishing inaccurate particulars. Therefore, merely because the taxpayer accepted addition or deletion and did not challenge the assessment order by way of appeal, it cannot be concluded that such addition or deletion amounts to concealment of income or furnishing of inaccurate particulars.

NOTICE CANNOT BE VAGUE

This decision has also criticized the cryptic and slip-shot manner in which penalty proceedings are often initiated and finalized. The Court has held that an Assessing Officer, while issuing a show cause notice for levy of penalty, should specifically state the grounds mentioned in Section 271(1)(c), i.e., whether it is for concealment of income or for furnishing of incorrect particulars of income. In either event, the person who is accused should be made known about the grounds on which penalty is intended to be imposed on him.

The High Court has further held that the practice of the Department in sending a printed form where all the grounds in Section 271 are mentioned, without specifying the exact charge, would not satisfy requirement of law, more particularly, when the consequences to the taxpayer, for not rebutting the initial presumption are so serious in nature that he has to pay penalty from 100% to 300% of the tax liability. The show cause notice issued should specify the grounds which a taxpayer has to meet specifically. Principles of natural justice would be offended, if the show cause notice is vague and on the basis of such proceedings, no penalty could be imposed on the taxpayer. In this context, the High Court has remarked that “taking up of penalty proceedings on one limb and finding the taxpayer guilty of another limb is bad in law.”